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The CEOs for Ford, GM, and Chrysler agreed to forgo their bonuses and accepted salaries of $1 each in order to qualify for the government bailout money. Will their sacrifice affect their performance?

Lets find out.

Richard Wagoner has been the CEO of GM since October 1998. The price of the common stock over this period has gone from $45.87 on October 2, 2008 to $4.70 as of December 10, a loss of 89.975% for anyone that’s been holding the stock since then. The data I was able to collect from AOL Money (revenue history) and Yahoo Finance (stock price history) dated back to 2003 so that’s the data that will be used for this analysis.

The graph on the left shows the revenue of GM vs. Richard Wagoner’s total compensation. The correlation for this graph is low, 13.62%. To compare, a correlation of 100% would be two lines that move exactly together. What this means is that Wagoner’s salary was largely independent of the GM’s revenue. This is not unexpected, read on to find out why.

Part of a CEO’s job is to keep the value of their stock high and their compensation should reflect how well they achieve that result. The second graph to the left here shows a comparison of Richard Wagoner’s compensation and the closing stock price for that year. What is clearly visible in this graph is that Richard Wagoner’s compensation is largely dependent on the market value of GM. The correlation for these two curves is: 98%.

The observable effect of this compensation package is that Wagoner has an incentive to keep stock prices high. Let’s see if Alan Mulally at Ford had the same incentives.

At Ford, CEO Alan Mulally has seen the stock price decline from $8.13 to $3.33 as of December 10, a decline of 59%. The revenue during his tenure has seen a lot of fluctuation but was only moderately lower in 2006 than it was in 2003. His compensation vs revenue curves had a correlation of: 69% and his compensation vs stock price had a correlation of: 17%.

In stark contrast to Richard Wagoner, Alan Mulally had more incentive to keep Ford’s revenue up by selling more cars than he did of keeping the stock price high. Perhaps this would explain why Ford is less needy than GM during this crisis.

Looking forward, we will see no correlation between the stock price or the revenue in the CEOs compensation. Their performance will be solely dictated by how much they care about the company’s future. These CEOs are not used to working for free. At the peaks of their compensation within the analyzed time period, the Richard Wagoner was earning above $25 mil per year and Alan Mulally earned just shy of $45 million in his highest paying year. Will it be difficult for them to adjust and thrive without salary incentives?

Economics teaches us that everything is done because of incentives and without easily quantifiable incentives such as compensation, we must use subjective analysis methods such as psychology and behavioral economics to determine if their performance will deteriorate on a $1 salary.

Were the CEOs in it just for the money?

Do the CEOs have any incentive to revive the company?

Does the fact that the CEOs had to be forced to accept $1 salaries make them resentful and less trustworthy?

Those are questions that need to be answered by insiders before we can determine whether this change will affect their performance.

I’m willing to bet that the odds of them increasing their performance while losing their incentives is almost nil. It’s probably time for the boards of those companies to post their want ads on Monster.

Update (Dec 12): I am still hopeful that the auto companies will get their bailout money, unless the senate can come up with a better way to use $14 billion quickly to employ 2.5 million people, I think that they should approve the loans.